Millinery Center Building Corporation v. Commissioner of Internal Revenue – Oral Argument – March 01, 1956 (Part 1)

Media for Millinery Center Building Corporation v. Commissioner of Internal Revenue

Audio Transcription for Oral Argument – March 01, 1956 (Part 2) in Millinery Center Building Corporation v. Commissioner of Internal Revenue


Earl Warren:

Number 255, Millinery Center Building Corporation versus Commissioner of Internal Revenue.

If you get to the side to see that Mr. Weiss.

Now, Mr Weiss, you may proceed.

Bernard Weiss:

May it please the Court.

This proceeding comes before this Court to settle a conflict in legal principles arising out of decisions rendered in two cases in this particular case in the Second Circuit and in the Sixth Circuit.

Now, in the Sixth Circuit case, the name of the case was Cleveland Allerton Hotel Incorporated versus Commission of Internal Revenue, the Circuit Court of Appeals held that a lessee of real property, the owner of a valuable building on such lease land is entitled to deduct, as an ordinary expense of doing business, the amount of a payment over and above the determined value of the land on the date of the purchase in order to be relieved of the burdensome terms of the lease.

In the Second Circuit under an identical facts, and I will come to the fact in a moment, held that the petitioner, lessee, is entitled to as a purchaser of a bundle of rights, which bundle of rights being a capital asset is not adoptable under Section 23 (a) of the U.S. Internal Revenue Code of 1939.

And instead that the bundle of rights consist of are reversionary interest in land and a reversionary interest in building and that the — that an allocation of the amount of the cost of the — of the property may be allocated between the value attributable to the building and the reversionary interest — reversionary value in the building and then to be spread over the remaining economic life of a building which both parties to this proceeding agree is 30 years.

The facts in this case are these.

In April 1924, this petitioner entered into a long time lease under the terms of which, he was required to construct and did in fact construct a 22-storey concrete and steel building on the corner of Seventh Avenue and 38th Street, New York City at a cost of $3 million under the terms of the lease, title to the improvement.

Title to the building, improvement, conditions, furniture and fixtures was to remain in the tenant throughout the term of the lease.

We had one peculiar provision in this lease.

I’ll — I’ll first go to the term of the lease.

The term lease of the lease was the original — the initial term of the lease is 21 years.

The lessee had the right and had the option to renew the lease for an additional 21 years and, thereafter, from additional 21 years if he saw fit to do so.

Under the terms of the lease, this petitioner was to pay for the year — first 21 years of rental, a net ground rental of $100,000 plus the income tax thereon which both parties to this — which both parties to that agreement agreed was equal to $18,840, this $18,840 being an additional amount of payment to cover the income tax on the $100,000.

The lease — the lease contained a provision to the effect that at the termination of the last term of the lease.

The title to the building and improvements was to pass to the landlord at his option.

And in the event that he accept the title for this property, he was to receive it free and clear of all incumbencies with — and without paying therefore.

And if he refused to accept title to the property, title to the building and improvements, this petitioner was required to raise this building and that is in his own cost.

I missed something.

Did you say that the rental on the renewal, two options for renewal —

Bernard Weiss:

Yes, two options —

(Voice Overlap) —

Bernard Weiss:

— for renewal.

I haven’t given him the terms of the options of renewal.

That’s what I thought.


Bernard Weiss:

The terms of the option for renewal where these.

That in the event that this petitioner were to renew the lease, the property — the land had to be appraised as if vacant and unimproved and evaluation of 6% — and 6% of — of the evaluation of this land as if vacant and unimproved would determine the amount of the rental to be paid for the succeeding 21 years.

Bernard Weiss:

But in no event was the rental to be less than $100,000, plus this additional sum of $18,840 representing the income tax thereon.

In April of 1945, this petitioner renewed the lease and he renewed it at the — at the so-called — but I would like to refer to as the saving clause, the minimum clause, a $100,000 plus the $18,840.

And the reason for that being that the landlord waived an appraisal of the land for the reason that 6% of the value of the land on the date the lease was renewed would have reduced a rental of less than $100,000.

In May of 1945, this petitioner entered into a contract of purchase of the fee to the land.

And at the same time, we — the agreement provided that the taxpayer — that the lessee was to be — was to be — I lost the train of my thought.

I’ll ask — I just — I’m sorry.

It’s just an aberration.

Let me see where I left off.

The —

Earl Warren:

He has paid $2,100,000 was needed to — was needed to pay $2,100,000 to —

Bernard Weiss:

Well, now, he agreed to pay $2,100,000 —

Earl Warren:


Bernard Weiss:

— for both the fee to the land and a cancellation of the lease and a release of the obligations of the lease.

Earl Warren:


Bernard Weiss:

In June of 1945, title to the property, in fact, passed through this petitioner who at the same time received the release of the obligations of the lease and the cancellation thereof.

The Tax Court of the United States found that the value of this land, vacant and unimproved, on the date of the purchase of this land, of the fee to the land was $660,000.

If $660,000 was the value of the land, vacant and unimproved, under the terms of this lease, this taxpayer would have been required to pay a rental of less than $40,000 per year.

Nevertheless, under the terms of this lease, he was required to pay $118,880 — $119,840.

Now, the reason for this — for this petitioner renewing the lease under such an outrageous condition that existed at the time was this.

The petitioner having constructed a building at a cost of $3 million had a remaining — which at the time of the — of the purchase the property had a remaining economic life of 30 years and a 60% value of the original cost.

Now, if he failed to renew this lease, he would have lost his interest in the property and he desire to retain that interest most naturally.

The contentions of the taxpayer throughout had been, throughout all the proceedings in the Tax Court, Circuit Court and here, is that the tax — that this lessee entered into this transaction for the purpose of being relieved of the burdensome terms of a lease.

And it is the contention of this petitioner that as a matter of law, any lease legally entered into which requires a — a lessee to pay three times the value of that — of a — three times the rental value of a property for a period of 21 years from the time you have — you renew the lease is a burdensome lease.

And that any payment made to get out from under such a lease is an ordinary expense under Section 23 (a) of U.S. Internal Revenue Code of 1939 and shouldn’t be allowed as a deduction.

Earl Warren:

How much depreciation had he taken in those first 21 years?

Bernard Weiss:

He had fully depreciated — his original cost was fully depreciated.

Earl Warren:

The $3 million?

Bernard Weiss:

Oh, yes.

The original cost had been depreciated and that is not involved in the case in view of the ruling of the Court and it will be recall that this petitioner made a request, made three separate requests.

One of which was not acted on and both sides — there’s no quarrel with the finding of the Court that the taxpayer was entitled at least to depreciation on the value of the building at the date of the acquisition of the fee in 1945 from the — from the landlord over the remaining life of the lease.

Bernard Weiss:

That is not involved in this proceeding except insofar as the Commissioner would like this Court to consider that this relief that the petitioner — that the lessee would receive by allowing him depreciation is sufficient depreciation and — and that he should be satisfied.

Unfortunately, the Commissioner of Internal Revenue has interpreted this way, the reversionary value with the building to mean, that this building shall be valued as if it were 21 years older and we’ll take the value — the — then, we will take that value and reduce it by a discount to arrive at what amount of money would be paid today to arrive at some sort of a figure which represents the depreciated value of the building 21 years since.

And then that figure would be allowed by way of depreciation over the next 21 years.

That is the way they are interpreting these words and, of course, that would simply mean less.

Under a calculation that they’ve arrived at in which they’ve told me in which it has nothing — it doesn’t appeal in this proceeding, they would have arrived at a value for this building of approximately $185,000, despite the fact that here is a man paying $2,100,000 for a land only worth $660,000.

Now, the testimony in this case which is undisputed and uncontradicted shows that the same landlord sold an identical twin puzzle to another party on the other side of the street, the identical dimensions for $600,000.

It is for this reason that we claim that the petitioner in making the payment, this excessive payment over and above the $660,000 or $1,440,000, was paying that amount of money to be rate of a burdensome lease.


The next 21 years, this taxpayer would have been — this lessee would have been required to pay a rental of two and one half million dollars.

And by making this payment, he has a valuable piece of land worth $660 and the balance is merely an amount paid to save himself these rental payments throughout the next 21 years.

And that is what the Circuit Court of Appeals and the Sixth Circuit held that that was an ordinary — that that item constitutes an ordinary expense.

It’s an amount paid to get rid of a — the burdensome terms of a lease and that it is no different and the rule should be no different merely because a purchase of land took place at the very same time that the cancellation of the lease was being work out or paid off.

Earl Warren:

We’ll recess now, Mr. Weiss.